Donor Diligence and New Nonprofits

donor diligence

Tyler Morning Telegraph, Give Well Column By Dawn Franks April 8, 2018

The daffodils are fading and the weather warming. I planted a few tomato plants and moved several potted plants to the back porch, and then the temperature dropped. Once again, I was misled by the inexact science of weather predictions. So, I check the “Old Farmer’s Almanac” and learn April and May will be cooler than usual. Maybe I will have more tomatoes, but when do the potted plants escape to the outdoors?

Too early, too late, too much or too little – survival is about the same for my tomatoes and new nonprofit organizations. Information is important.

The farmer’s almanac of nonprofits might be GuideStar, a useful source of nonprofit data. It has a database of more than 2.2 million nonprofits in the U.S., which includes more than 1.8 million active organizations.

Part of the difference is the result of IRS terminated tax-exempt status. Since 2011 the IRS has revoked the tax-exempt status of more than 500,000 nonprofits due to not filing the required form 990 for three consecutive years.

Until 2011, many nonprofits just faded into a quiet death. Sometimes, they jump-start years later under the same tax-exempt status, with a new board of directors, mission, even services.

Even so, the nonprofit sector is burgeoning. In a 2015 Nonprofit Sector Brief, the Urban Institute indicated during the decade from 2003 to 2013 public charities grew 19.5 percent.

Experts tell us more than 50 percent of new businesses fail within five years. Nonprofit experts believe the number is even higher for nonprofit organizations. That’s the donor challenge: how to make wise giving decisions to just birthed or toddler nonprofit organizations.

Let’s unpack the challenge for the new organization in the first five years.

A good idea, passion and a mission do not ensure healthy management. Inexperienced and unskilled can lead to early failure. Especially common is limited financial experience.

On a personal note, when I ask an inexperienced executive director the size of the budget and hear “I don’t know or I’m not sure,” I cringe. If the number is too large, my radar goes up. As a donor, I feel compelled to weigh the importance of proper fiscal management against the passion, mission and service. A nearly balanced scale is critical, or there is little hope of sustainability.

Lack of fundraising experience leads to a shortage of donors and too few revenue streams. Fundraisers can cost more than they raise, diverting critical dollars away from services, or raise too little.

My friend Ron Gleason says special-event fundraisers are akin to asking rabbits to carry lettuce to market. Too little remains by the time they arrive. It’s a trap many organizations fall into, especially so in the early years.

Young nonprofits often say if only we had large donors. That thinking jeopardizes their sustainability, as they are unprepared when donors move on to other interests or die.

Be cautious if the size of the board of directors is below five; or related by blood, marriage or friendship to the founder. Public charity status is intended to serve the public good. The board of directors, responsible for establishing direction and prudent fiscal oversight, should be a number large enough to understand the community they serve and the community in which they live. And this is very important: The board of directors should be large enough to include a variety of skill sets.

Each of these issues threatens the fledgling nonprofit organization. The question is always how can you be a wise donor and ensure donations are used well?

Donate to new and young nonprofit organizations with eyes wide open.

If you believe in the mission and you trust the leadership and board of directors then, yes, make a donation. Consider starting small and increasing your support for their cause as they grow. The alternative is a more substantial gift to help them start up but be clear it will decrease as they expand the donor base.

Always pay attention to the board of directors, especially so in the early years. Ask how much the organization spends to raise funds.

The bottom line is keeping your eyes wide open to be a wise donor.

Dawn Franks, CEO of Your Philanthropy, offers advising services to families, businesses and foundations to enhance the giving experience and maximize impact. She writes a blog, the YP Journal, at www.your-philanthropy.com. Comments and questions are welcome. Send to info@your-philanthropy.com.

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